Deprived.

Sleep eludes me. So does the word 'tradition'. Chinese tradition to be exact.

Irregardless i think economy is a magnified version of biology. Think about it. Just like how women are magnified versions of girls, or not.

I need to solve a sudoku puzzle in 2 minutes.

I need sleep, too.

Traffic Lights.

Sometimes rays of enlightenment gently caress the palpable surfaces of our mental acuity, leaving behind in their wake the conception of an idea, at its very inception. Mine revolved around these machined self-effacing traffic controllers many of us barely take note of as we dutifully trudge on in our mundane lives. These pieces of machinery which emit different lights accordingly play such vital roles in maneuvering the traffic, occasionally even drawing violent fulminations from spinning tires as they screech to a standstill, leaving traces of burnt brake and rubber in the air. They face implacable rush hours undauntedly. They allow pedestrians to stride across busy roads. They are so essential that without, the days as we know them would descend into traffic anarchy. Yet there are those who remain intransigent to the meaning behind the lights, the gracious green for please-carry-on-have-a-nice-day, the mellow yellow for slow-down-you-accelerating-boobs and the radiant red for stop-unless-you-have-a-death-wish-or-good-insurance-policy.

They are so hauntingly beautiful because even in the absence of human and cars, they continue on in their sedentary tasks, switching eternally from green to yellow and then to red, hinting at the phantasmic existence of humanity. [Well, of course we have not adopted energy-saving traffic lights which switch off temporarily when the streets are deserted]

What AIG Did.

Legend
AIG, you should already know what AIG is.
I        =     Investors
IB      =     Investment Banks
CDO =     Collateralized Debt Obligations

AIG sold CDS to not only holders but also speculators. CDS are Credit Default Swaps, another complex derivative. Fundamentally they insure those who bought the aforementioned CDOs. But people who do NOT own the CDOs could buy as well! Now of course like any other insurance you have to pay premium, right? So that's how AIG earned money from this.

Sure when everyone is paying their mortgage then the money goes up the chain to AIG and AIG receives those premiums, everything seems perfect, savvy? Wrong. Have we forgotten that the CDOs were made up of loans taken by the those who would face problem when it comes to financing?

When they default, AIG pays them back, whether it's 100 cents on the dollar or not i am not too sure as that goes into the minute details. This repeats itself with those speculators who bought CDS from AIG as well. That purveys the explanans as to why AIG needed bailout from the Feds.


However these merely skim through the multifaceted disaster. For example, there is the housing bubble and the bursting of the bubble, why asset value dropped, how that culminated to a liquidity crisis or how a vicious cycle flows underneath all these, like the rebuying of the derivatives by the same companies mentioned or some sort like that which contributed to the whole economic calamity.

:D

Oops.

I left out the part that is most important. Ideate this. What happens when the Borrowers fail to pay? Foreclosures, yes. Investments fall rapidly. Investment banks who are still holding on to these CDOs suffer huge losses. Investors suffer huge losses. Workers suffer huge losses.

Now is where AIG comes in. But before that let's rewind back to what AIG did prior to this impending crisis.

Subprime Mortgage Crisis.

My understanding on this matter has increased somewhat marginally. Here is my take so far.

There are 6 major titles that you have to keep in mind.
1) Borrowers              [B]
2) Lenders                  [L]
3) Investment Banks[IB]
4) Investors               [I]
5) CDO (collateralized debt obligations)
6) CDS (credit default swaps)

So the borrowers which are in this case potential HOME buyers will take loans from these lenders, whilst the lenders sell these mortgage loans to investment banks [Hence the investment banks are in charge of the loans]. You must comprehend that subprime lending [refer to title] means loaning money to the various groups of the society, all of which most probably would have trouble with the repayment of the loans.

Now these investment banks (GS, ML, LB etc) would agglomerate these loans along with a horde of other subprime loans [ eg. car loans, credit debt]  into what we would come to know as CDOs, which are convulated derivatives. Following this, the investment banks would pay rating agencies namely Moody's, Fitch and S&P to assess the CDO and these agencies are paid and paid well. Therefore, the CDOs are given AAA ratings. Take note, these institutions merely offered their opinions on the matter and hold no responsibilities whatsoever.

What happens next is that these CDOs would be sold to investors who based their decision mostly on these ratings albeit the fact that they should first understand what they were buying exactly. Let me elucidate the P.O.V. of these investors.

They see CDOs as high return investment, higher than any other types of investment. For example if the Borrowers took a loan of 100,000 Dollars and there are 100 Investors, each would have invested 1000 Dollars; And due to the high interest rates, these Investors would get back say 1250 Dollars by the end of the bond repayment. I mean famous rating agencies declared that these investments were AAA! And they had such high return rates! Why not invest?

But what did investment banks get from these sales, i mean the risk is ostentatiously high but you see they are not the ones shouldering it, the investors are the unfortunate ones. Thus, when the investment banks sell these derivatives to the investors they charge say a 'small' fee for it. So continuing with the example, each investor would earn 250 Dollars, now, say the investment banks charge a fee of 50 Dollars that wouldn't be too much, right? Yes. That's what the investors thought as well. So therefore, short term performance is being focused on, whereby the more CDO they sell, the more they profited from it. This leads to predatory lending, where no one cares how unsuitable the loans were for the borrowers and who they lend the money to; as long as they rake in mortgage loans to be sold. Except the investors of course but this fact was obfuscated to them wasn't it?

Now, of course another reason as to why these borrowers were further mired into their intractable quandaries was because of the steep fall in house prices. Yes it was high and yes it was rising but when it suddenly fell, the eddy effect of the sudden decrease knocked borrowers down. I am still reading on this.

next is :

Why AIG Nearly Fell.

ps. i know i know i should be covering on more recent news like the ludicrous anti-blasphemy laws in Pakistan which led to several deaths or the vital ramifications after Hosni Mubarak's downfall, or the blatant refusal of Laurent Gbagbo to acknowledge the fact that Alassane Ouattara has already won the elections held in november or whether Gaddafi is going to go down but yeahh this held my attention suddenly. like a dormant seed of interest that sprouted shoots and leaves of curiosity :D

I don't get it.

I may sound like an obsolete recording machine when i say this, not to mention naive and ignorant, but could Lehman have survived had they bought CDS from AIG. Did they? [like what GS did] or did they not bet against the massive bulge of CDO? Because i mean the FEDs bailed AIG out and AIG 'bailed' GS and various other institutions out but was Lehman supposed to be one of them.

Please help me.

To Read.

What happens when you cannot attain an experience firsthand?
You ask others who have or you read.

What happens when you are despondent and suicidal?
Well this is a little tricky, you do the deed or in this case the 'sin'. If you do not, you take drugs. If you do not, you hire a therapist. If you do not, you read; about what others have gone through or more like HOW others have gone through.

What happens when you are unsure or feel inept with something?
You read.

What happens when you want to impress someone intellectually? Wait let me rephrase, what is one of the methods to make yourself look less dowdy?
You APPEAR to read.

What happens when you feel tired?
No, you don't read. You sleep.